Transparency in the Mortgage Market

26 Pages Posted: 18 Nov 2016

See all articles by Andrey Pavlov

Andrey Pavlov

Independent

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Albert Zevelev

Independent

Date Written: March 21, 2014

Abstract

This paper studies the impact of transparency in the mortgage market on the underlying real estate markets. We show that geographic transparency in the secondary mortgage market, which implies geographic risk based pricing in the primary market, can limit risk-sharing and make house prices more volatile. Ex-ante, regions prefer opaque markets to enable insurance opportunities. We discuss the implications for risk based pricing and house price volatility more generally.

In addition, we investigate the specific conditions under which competitive lenders would optimally choose to provide opaque lending, thus reducing volatility in the real estate markets. We show that in general the opaque competitive equilibrium is not stable, and lenders have incentives to switch to transparent lending if one of the geographic regions has experienced a negative income shock. We propose market and regulatory mechanisms that make the opaque competitive equilibrium stable and insurance opportunities possible.

Keywords: mortgage market, mortgage, transparency, transparent, mortgage lending

JEL Classification: G21

Suggested Citation

Pavlov, Andrey and Wachter, Susan M. and Zevelev, Albert, Transparency in the Mortgage Market (March 21, 2014). Available at SSRN: https://ssrn.com/abstract=2870751 or http://dx.doi.org/10.2139/ssrn.2870751

Andrey Pavlov

Independent

No Address Available

Susan M. Wachter (Contact Author)

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

Albert Zevelev

Independent

No Address Available

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